Step 1: Determining Adjusted Gross Income (AGI) Earned Income-money received by personal effort. Investment Income-money received in the form of dividends, interest, or rent Passive Income-activities in which you do not actively participate. Other Income-Alimony, awards, lottery winning, prizes
Other Items That Impact Income Exclusion-amount not included in gross income. Tax Exempt Income-another name for exclusions-Qualified scholarships and fellowships where money is used for tuition, fees, supplies, and equipment, VA payments Tax Deferred Income-income that will be taxed at a later date Adjusted Gross Income (AGI)-gross income after certain reductions have been made Tax Shelters-immediate tax benefits and a reasonable expectation of a future financial return (IRA’s Keogh’s)
The Marginal Tax Rate Affects Your Final Decision $3,650 personal exemption is not taxed $5,700 standard deduction is not taxed Next $8,350 of income is taxed at 10% Next $25,600 of income is taxed at 15% Remaining $16,700 of income is taxed at 25% 0 + 0 + $835.00 + $3,840.00 + $4,175 Gross Income = $60,000 Taxes = $8,850 Marginal Tax Rate = 25%
Eight Steps in Calculating Your Income Taxes Step 1 Total Income Subtract exclusions Step 2 Subtract adjustments to income. Step 3 Subtract standard deduction or total itemized deductions. Step 4 Gross Income Adjusted Gross Income Subtotal Taxable Income Subtract value of exemptions Step 5 Apply tax table or tax-rate schedule to determine liability. Step 6 Final tax liability Subtract tax credits Step 7 Calculate balance owed or refund. Step 8
Use your taxable income in conjunction with the appropriate tax table or tax schedule.
Marginal tax rate-the tax on the last dollar of income.
Average tax rate-total tax due divided ty your taxable income.
Tax credit-amounts subtracted from the amount of tax owed.
The Progressive Nature of the Federal Income Tax-2010 If your filing status is Single The Tax Rate Schedule is shown so you can see the tax rate that applies to all levels of taxable income. It is not used to figure ones’ taxes. If your taxable income is: Over: But not over -- The tax is: Of the amount over-- $0 $8,350 ------------ 10% $0 8,350 33,950 $835.00 + 15% 8,350 33,950 82,250 4,675.00 + 25% 33,950 82,250 171,550 16,750.00+ 28% 82,250 171,550 372,950 41,754 + 33% 171,550 372,9650 ---------- 108,216 + 35% 372,950
Is it Taxable Income? Is it Deductible? Is it Taxable Income? Yes No Lottery Winnings Child Support Received Worker’s Compensation Benefits Life Insurance Death Benefits Municipal Bond Interest Earnings Bartering Income Is it Deductible? Yes No Life Insurance Premiums Cosmetic Surgery for Improved Looks Fees for Traffic Violations Mileage for Driving to Volunteer Work An Attorney’s Fee for Preparing Will Income Tax Preparation